Budget 2018

Budget 2018 – Expectations !!

The expectations are running high – what the Budget can or should deliver as it is the last full year Budget by the current government before May 2019 general election and post GST.

Capital Market Response

Since 2010, the Sensex has gone up six times out of nine in the month after the Budget. Similarly, the benchmark index has also fallen eight out of nine times during the month prior to the Budget.

Though this time, we have not seen a significant correction ahead of the Budget, the chances of graph moving in the upside direction post Budget seems to be limited.

Receipts & Expenditure

FM Arun Jaitley has the unenviable task of balancing economic with politics. Fiscal deficit for FY18 could be 3.4% (below 3.5% for FY17) vs Budgeted 3.2% of GDP (a slippage of only 20 bps) due to higher divestment receipts and cutback in expenditure (mainly capital) offsetting the fall in GST collections and lower receipts from RBI.

Fiscal deficit for FY19 could be projected at 3.2% (thus being on the path to fiscal responsibility, though with some lag). For FY19, expenditure focus areas would be agriculture and housing.

In agriculture, the GoI would specialize in addressing the rural distress by subsidy mechanism wherever the market {price|market value|value} of crops fall below the minimum support price (MSP). Capex focus can be on irrigation, food provides chain, rural roads, and housing.

Common Man & General Business

On the taxes front, we have a tendency to expect to raise of exemption limits for people from ₹2.5 lacs presently to ₹3 lacs, company rate being cut to 25th for firms with annual sales up to ₹100 cr (vs ₹50 cr earlier), period of holding for LTCG being raised from this one year to 2 or 3 years, and no alternative major reliefs.

Global Macros

If crude prices settle at $75+ in FY19 and/or GST collections do not grow robustly (leading to a further growth in GDP), then the stress on the fiscal deficit will become visible with its impact on inflation and interest rates.

Otherwise, CPI could hover @5% in H1CY18 and between 4 to 5% in H2CY18. The 10-year bond yields could remain in the 7.1-7.6% band for better part of CY18.

GST & Insolvency

Among indirect taxes, GST is the prerogative of the GST Council and hence apart from some policy direction, no changes in GST are expected out of the Budget. Some tinkering of import/export duty is possible. GST collection growth and insolvency code progress are two major themes to follow in 2018.

Private consumption is expected to stay strong; 2018 monsoon could be a concern. Some populist giveaways are likely though without the major dent in the fiscal situation.

Overall, we see fewer negatives from this Budget. Possibilities of an unexpected large positive are also limited.